How I made thousands in interest with no money!

It all started with buying an engagement ring

In 2005, I proposed to my wife at Disney on Splash Mountain. Of course, just before this, I bought the engagement ring and learned a valuable lesson that would go on to shape the way I think about money and debt.

Good Debt vs Bad Debt

Let’s be clear – there’s “good debt” and “bad debt.” Generally, a loan taken on something that will likely appreciate is good debt. Examples would be a home loan, a loan to start a business, and even student loan debt to pay for education. Of course, good debt is only as good as the research you do before taking out the loan. Good debt should ultimately leave you with more money when you finish paying it off.

Then there’s bad debt.

This is what most people think of when they hear the word debt. It covers credit cards, personal loans, high-interest car loans, payday loans, and more. In general, these are loans taken for something that ultimately will not leave you with more money/value when you finish paying them off. But just as not all good debt is good, so it is also true that not all bad debt is bad.

And this brings me back to the engagement ring

I try very hard to have as little bad debt as possible. It’s this line of thinking that leaves me ensuring that I save up the cash for my wants before I act on them. Case in point, I had saved up and had cash in hand ready to purchase my wife’s engagement ring when I got a fortuitous piece of junk mail.

Enter the 0% interest credit for 12-months credit card offer

The important thing about 2005 was that the banks were all competing to get you to convert to their online savings accounts. They did this by trying to lure in new customers with increased interest rates. As I had been saving for the ring, every time a better banking offer came around, I’d simply move my money to the higher interest savings account. I believe it started with ING offering 4.5%, which then kept slowly increasing to compete with the next bank. Emigrant Direct, Everbank, HSBC, and Discover all got into the mix, and each one came out with higher interest rates. When all was said and done, I believe I was getting between 6% and 7% interest on savings!

At the same time, I was getting tons of junk mail for 0% credit card offers. I usually just shred these, but as I was about to make a big purchase, it made me think. I was getting a really nice return on the money for the engagement ring, and now I was about to go spend it all. If I applied for the 0% card, I could keep the money in the bank for an extra 12 months!

Then the deal got better

As I said, I’ve always been cautious with credit cards and ensure I have the money to pay them in full every month. That said, I do like to use them to get the rewards. In 2005, I only had 2 credit cards (the reason is worth its own blog post). Hence, as I decided to pursue the idea of financing the ring, I called up my existing credit card provider and explained that I would like to cancel my credit card. I told them that I have an offer for a 0% card, and I want to use it to finance a large purchase and didn’t want too many cards. Their answer changed the way I’d go about saving from that point on.

I agreed and hung up the phone feeling like a fool for nearly canceling a credit card I really liked without thinking to ask if they could do that in the first place. It was decided, I’d use my existing credit card for the purchase.

But… I still had the offer…

Then it occurred to me, I still had the offer for the other credit card for 0%. As I’m always concerned about credit scores, I did some research to see how maxing out 2 credit cards would affect mine. I learned a bit about debt to credit ratio and ultimately decided that any damage I may do could be quickly undone by paying everything off. If I missed a payment or got dinged with a penalty, it would make the plan forming in my mind totally useless… but under just the right scenario, it could work.

I applied for the card

Within a few short days, the card arrived, and perhaps even more magically, a few short days later, balance transfer checks came. At the time many banks offered 0% interest with 0% balance transfer and no fees!! This was much more common in 2005. Apparently, about 1 in 5 banks (based on my own memory of junk mail) would offer a 0% balance transfer. I said a little prayer, and wrote out one of the balance transfers to myself for the full amount of the available credit limit and deposited it into my checking account. A few days later, the entire available balance was there, and my credit card was maxed out!! Shortly thereafter, my credit score dropped a little – but trusting what I knew of the formula, I persisted.

Within a couple months’ time, I had about 10 credit cards maxed out.

I watched my credit score drop about 200 to 300 points but wasn’t planning any significant purchases in the near future. By the end of that year, I had earned around $4000 in extra interest income on money that wasn’t mine. More importantly, that was an additional $4000 I was able to put toward my wedding and honeymoon!

And yes – when I finally paid everything off, my credit score jumped right back up – actually jumping up even higher than it started!

While this deal no longer exists, it permanently changed my relationship with money

This grand experiment made me realize a few things and permanently changed my relationship with money. Perhaps my biggest take away is tied to how much money to keep in the bank. Imagine if you have $10,000 in savings and you owe $100,000 on your house. If savings are getting a return of the current national average (0.01%) and you are paying a phenomenally low-interest rate on your $100,000 mortgage of 3%, then you are actually paying 2.99% interest on the $10,000 in the bank!

So the obvious answer is to not keep any money in the bank if you have any debt

But this is a horrible idea.

For one, you need to keep at least enough money to pay your bills. The way I do this is by my reverse budget bucket system. That would mean we have enough money to pay for basically one month of all expenses saved. If we’re super creative, this can be further tweaked to “borrow against the float” – but this is an advanced topic for another day.

But what about an emergency fund?

So basically you should have three to six months worth of expenses as liquid cash assets (ie. savings).

This is a lofty goal

Not only is this difficult for most people to achieve, but when coupled with the fact that you are paying interest on your savings if you have any debt, it can actually be a losing proposition.

Important Disclaimer

The method I’m about to describe is sophisticated and challenging to maintain, while it has personally served me well, it needs to be tracked VERY carefully. The vast majority of people will be much better off solely striving to achieve a 3 – 6-month buffer in savings and calling it a day. Without being incredibly meticulous, it is possible and very likely to end up loosing far more in fees and interest than just the difference between your savings interest rate and your debt interest rate.

YOU HAVE BEEN WARNED.

The Problem

Let’s say:

• You make $50K annually
• After taxes, you take home about $33K/year
• This would come out to about $2777.75/mo. income
• Let’s further assume your saving about 20% of your income.
• This means you have expenses of about $2222.20/mo.

That means you need $2222.20 * 6 months = $13333 in emergency savings

That means while you’re paying your expenses you also need to save an emergency cash cushion before you can start saving for discretionary things – vacations, cars, down payments, etc.

Saving $2777.75 – $2222.20 = $555.55/mo

Creating your emergency fund would take 23 months! ($13333/$555.55)

Also, assuming your highest interest rate on any of your debt is 3% (which is likely low) and your savings interest is 0.01%, you will be paying $399.95/year in interest on your emergency fund.

The Solution

The simple solution – let someone else finance your emergency fund at 0% interest and store it in the safest high-interest savings you can find.

Before you begin, simply:

1. Find a 0% credit card offer. (Here’s one for a Discover Card that will give you and me a $50 credit!)
2. Find a high-interest savings account (I recommend Discover Savings https://www.discover.com/online-banking/savings-account/ and I don’t even get a commission!)

At this time there is only 1 credit card I’m aware of that does a $0 fee balance transfer and there are some hoops to jump through.

Although the balance transfer approach can be more lucrative, it’s also more advanced, so for now the easiest thing to do is simply start paying for your monthly expenses on the 0% card. If you want to have a 6-month emergency fund, simply pay for your expenses for 6 months on the 0% card. In 6 months you’ll still have all of the money that would have gone to those expenses in savings.

It’s still a credit card and there is RISK

You’ll, of course, need to ensure you pay the minimum fee each month, or else the penalty will quickly override any possible interest you could have made off of the emergency fund.

Additionally, paying the minimum will not pay off the credit card by the end of the 0% promo period! This means you need to keep detailed records and know when the 0% promo rate ends. Typically I pay off the credit card at least the month before it’s due to ensure I don’t miss anything.

This will affect your credit score

I actually like to think of this strategy as cashing in on my credit score. First, ensure you don’t have any major planned purchases coming up in the near future, and know that it should recover quickly when you pay off the debt – provided nothing is late or missed. Also if you happen to have very good credit, remember that 720+ is generally considered excellent. To put that another way, an 850 or a 720 will generally get the exact same interest rates offered, so if your in the upper end of this range you’re likely not affecting the offers available to you.

Synergy!

You can couple this strategy with credit card awards strategies! More on this sometime in another post 🙂

FAQ time

Let me know in the comments if you have any questions 🙂